Comprehensive Guide to Canadas Registered Education Savings Plan (RESP)

Lately, I’ve been receiving numerous inquiries regarding the Registered Education Savings Plan, commonly referred to as RESP. It’s no surprise that many of my friends are looking into RESP regulations, especially since many have recently welcomed children. In fact, one of my first actions after my daughter was born was to establish her RESP.

Essentially, an RESP serves as a savings account designed to support your child’s educational expenses. To encourage saving, the government offers an RESP grant, which matches 20% of your contributions. Additionally, there are tax advantages tied to an RESP, making it the ideal method for saving towards your child’s post-secondary education.

Registered Education Savings Plan Rules

If you are thinking about initiating a Registered Education Savings Plan, it is vital to be aware of some fundamental guidelines.

• An RESP can be designated for any “beneficiary” such as your children, grandchildren, or family acquaintances.
• The beneficiary must reside in Canada and possess a Social Insurance Number.
• There is a lifetime RESP limit of $50,000 per beneficiary.
• You can receive a 20% grant up to $500 annually through the CESG.
• Contributions can continue until the beneficiary is 31 years old, and the RESP can remain open for up to 35 years.
• The RESP can contain various investments like mutual funds, ETFs, stocks, bonds, and GICs.
• While the funds are in the RESP, capital gains are tax-exempt.
• There is no tax deduction for RESP contributions.
• Funds withdrawn as Educational Assistance Payments are taxed to the beneficiary.

Many individuals perceive the RESP rules to be convoluted; however, as illustrated above, they are relatively straightforward. I recognize that some may still find it perplexing, so I will simplify things further to clarify how RESPs function.

Types of RESP in Canada

When discussing the categories of Registered Education Savings Plans, I am referring to the variety of plans you can establish. In Canada, there are three primary types of RESPs you should be aware of:

Non-Family Plan

Most individuals choose a non-family plan when setting up an RESP for their first child. This option ensures that the RESP is tailored to the specific child. A benefit of this arrangement is that you can align your investment strategies with the beneficiary’s timeline, without the concerns of how your choices affect other beneficiaries.

Family Plan

Some parents prefer family plans as they accommodate multiple beneficiaries related by blood or adoption to the subscriber (the plan’s creator). This plan involves a communal fund allocation, allowing you to manage resources as required. However, with multiple children involved, you may need to adopt a more cautious investment strategy.

Group Plan

I would advise caution when considering group plans. Though they appear attractive due to offering a defined payout, they come laden with numerous stipulations, meaning there’s no assurance that you will receive what you expect. A quick search for RESP group plans in Canada will reveal many unfortunate experiences.

RESP investment options

As mentioned earlier, a Registered Education Savings Plan functions as an investment vehicle, allowing you to include a mixture of assets within the account, such as:

• GICs
• Bonds
• Mutual funds
• ETFs
• Stocks

Since this account is meant for your child, many investors lean towards less risky options. While this mindset is understandable, remember that if the RESP is established when your child is born, you will have 16-18 years for the funds to grow. This allows ample time to cultivate a balanced portfolio that corresponds to this timeline.

For those who are DIY investors, this won’t pose a challenge. However, newcomers to investing might find this overwhelming. Consequently, many investment firms offer mutual fund options that automatically rebalance portfolios according to the anticipated start date of your child’s post-secondary education. While this is a reasonable choice, the management fees typically exceed 2.5%, which can be quite costly.

A preferable alternative might be to engage a robo-advisor, which accomplishes similar rebalancing but with significantly lower fees. For instance, I recommend Justwealth’s RESP portfolios, which utilize target dates while charging more competitive rates compared to many financial institutions. Clients pay either a minimum fee of $2.50 monthly or a 0.5% annual fee (whichever is greater). Plus, you receive a complimentary $50 when you open an RESP with Justwealth via my referral link.

Canadian Education Savings Grant (CESG)

A key incentive of the RESP is the grant, formally known as the Canadian Education Savings Grant (CESG). This grant provides a 20% match up to $500 per year for contributions made. Thus, if you deposit $2,500 into your child’s RESP, that results in an extra $500 being added. Conversely, if you invest $2,000, your child receives $400.

Understanding that you might not always have $2,500 available annually, the government allows you to carry forward the grant for one year. In other words, if you skip a year’s contribution, you can deposit $5,000 the subsequent year and still claim the full $1,000 CESG grant for that period ($500 x 2). However, you cannot make a $25,000 deposit in one year and expect a decade’s worth of grants.

It’s important to note that there is a lifetime CESG threshold of $7,200 until the beneficiary turns 18, meaning that if you opened an RESP when your child was born, he or she could reach that limit by the age of 14.

RESP grant for lower income families

To further encourage savings, families with lower incomes can receive an additional $100 annually from the CESG. Households with an income below $50,197 can earn a 40% match on the first $500 contributed, plus 20% on all contributions up to $2,500, yielding an overall annual RESP grant of $600.

If your family income is between $50,197 and $100,392, your child would qualify for a 30% match on the first $500 contributed to their RESP. Contributions up to $2,500 continue to earn the 20% match, totaling a $550 annual grant from the CESG.

Additionally, low-income families may be eligible for the Canada Learning Bond, which can contribute up to $2,000 towards an RESP without requiring any personal deposits.

Bear in mind that these income thresholds adjust annually based on the altered family net income reported on your tax return from the previous year. Irrespective of your income level, the lifetime CESG cap remains at $7,200.

RESP Withdrawal rules

When your child is prepared to make withdrawals from the RESP, two scenarios should be considered:

When the funds are earmarked for education – Upon acceptance into an eligible post-secondary institution, you can withdraw funds from the RESP provided you submit proof of enrollment. Any distributions made, including grants and bonds, are classified as Educational Assistance Payments (EAPs). The beneficiary is required to report these payments as income when filing taxes. Given that most students have minimal to no income, withdrawals from the RESP are generally tax-free. It’s worth mentioning that you can also utilize your RESP while studying abroad.

When the funds are withdrawn and not used for education – If your child opts not to pursue further education, you can still withdraw your initial contributions tax-free. However, any accumulated income (interest and capital gains) will incur taxes at your income level, plus an additional 20% penalty.

Moreover, if your child decides against educational pursuits, you have the option to transfer the CESG to a sibling with available grant room. If this isn’t possible, both the CESG and any bonds must be returned to the government.

Upon closing the RESP, you can minimize your tax burden by transferring up to $50,000 of accumulated income to your own or your spouse’s RRSP, provided you have sufficient contribution capacity. For additional information on scenarios involving unused RESPs, check out this post.

Final thoughts

If you’re looking to assist your child with further education, opening an RESP is one of the most effective methods. The 20% grant you receive from the CESG is essentially free money, guaranteed! Even in the event that your child chooses not to pursue their education, you will not forfeit your original contributions. Consider using my Justwealth referral link and receive a $50 bonus upon establishing an RESP with them.